The COVID-19 pandemic-era recession was unlike any other in U.S. history. Beginning in February 2020, the recession quickly reached depths not experienced in roughly a century before abating just as fast—lasting just two months according to the National Bureau of Economic Research. A combination of unprecedented fiscal support, rapid deployment of vaccines, and structural economic resilience all helped jumpstart the swift and enduring U.S. recovery, with the economic expansion now entering its fourth year. As the economy continues to grow, two important characteristics have emerged: (i) the U.S. avoided the deep economic scarring that impacted millions of American households in the last recovery; and (ii) the U.S. recovery has far outpaced most of its G10 peer countries.
The prior recovery was marred by economic scarring that emerged from insufficient fiscal support for households and businesses. Following the Great Recession, consumption was very slow to return to its precrisis level, causing a large output gap to emerge, which held down inflation but also limited demand for labor. With employment depressed, millions of discouraged workers exited the labor force and many more would struggle to return to prerecession earnings levels. As a result, consumption and residential investment remained depressed and the output gap between potential and actual GDP persisted.
In the wake of the pandemic, many of the United States’ competitors repeated its mistake in the prior recovery. As the global economy remained disrupted by COVID-19 in 2021 and beyond, many foreign governments opted for premature fiscal consolidation in which the policy response was too muted and insufficient to help return their respective economies to prerecession form. By contrast, policymakers in the U.S. opted for more generous countercyclical support—including massive relief bills passed under both Democratic and Republican administrations that would provide assistance past even the omicron and delta waves of COVID-19. As a result, there is now no meaningful slack in the U.S., unlike in Europe where activity is once again falling behind its prepandemic trend. Perhaps most important, U.S. labor force participation has risen to record highs across major population groups, especially among prime-age women. Elevated inflation in 2021 and 2022 abated quickly and in recent years was driven more by supply constraints in the housing market than by fundamental imbalances in supply and demand. The steady fall in non-shelter year-over-year inflation, which now stands at just 1.1%, underscores that supply disruptions—not overheating—were by far the main driver of high inflation right after the pandemic. All told, the post-COVID recovery reaffirms the difficult choices made by policymakers and ultimately vindicates U.S. policy choices.
Avoiding an output gap
The key to the relative strength of the U.S. recovery has been the absence of a sizable output gap following the COVID-19 shock. Whereas the U.S. economy never regained its pre-2008 momentum after the global financial crisis, ample fiscal support in 2020 and 2021 helped preserve economic activity at prerecession levels save for a temporary drop following widespread lockdowns. While output gaps are notoriously difficult to measure, a simple extrapolation of the pre-2008 growth trend suggests there was substantial slack in the decade after the Great Recession (Figure 1). This large output gap meant chronically low inflation in the years that followed, but also prompted millions of discouraged workers to exit the labor force—which led to a sluggish recovery in both household balance sheets and the national housing market.
The pandemic threatened a repeat of that experience, especially as large parts of the services economy were shuttered. However, aggressive fiscal stimulus ensured that did not happen, as pandemic-relief legislation explicitly aimed to preserve payrolls while also providing generous financial and in-kind support to households. This support in the U.S. was far more generous compared to the rest of the G10 and—as a result—the U.S. has now meaningfully outperformed its peers. Indeed, private consumption has grown at a faster rate than in the rest of the G10, in absolute (Figure 2) and per capita terms. If the U.S. economy had grown at the same rate as the G10 median since Q2 2021, U.S. GDP would be a cumulative three percentage points lower by Q2 2024. In other words, had U.S. policy not pursued its aggressive course, there would again be a material output gap.